A Wider Middle East War Doesn’t Have to Mean Higher Oil and Gas Prices

Oil prices recently surged by about 2.5% following a significant escalation in tensions in the Middle East, specifically after Iran launched several hundred ballistic missiles at Israel on October 1. With Israel poised to retaliate, there is widespread concern that a broader conflict might ensue, as many have long feared. However, this spike in oil prices remains limited, indicating that market participants believe oil supplies from the Middle East will remain intact even as hostilities escalate.

The Complexity of Middle Eastern Conflicts

The ongoing conflict is deeply rooted in a history of violence and hostility, particularly between Iran and Israel. The recent Iranian missile assault can be viewed as retaliation for Israel’s increasing military actions against groups like Hezbollah and Hamas, which Iran financially supports and strategically utilizes.

The backdrop of this violence includes a series of events: the brutal Hamas attack on Israel on October 7, which resulted in nearly 2,000 Israeli deaths, followed by Israel’s invasion of Gaza. The earlier assassinations of key Hamas and Hezbollah figures by Israel served to further ramp up tensions, leading to Iran’s latest aggressive response.

Will Oil Prices Actually Soar?

Despite alarmist scenarios predicting soaring oil prices as a direct result of military escalation, experts suggest that an energy war is unlikely to materialize. The oil market’s reaction indicates that both Israel and Iran, as well as other players in the region, will prioritize keeping oil flowing to avoid catastrophic economic consequences.

Why Israel Might Avoid Attacking Iranian Oil Facilities

There are three key reasons why Israel is unlikely to target Iranian oil facilities, which are vital for Iran’s economy:

1. U.S. Diplomatic Pressure

Israel’s most crucial ally, the United States, is expected to exert pressure to ensure that Israeli actions do not disrupt Iranian oil exports. Given the context of the upcoming U.S. elections, with significant stakes involving Vice President Kamala Harris, maintaining stable oil prices is of utmost importance. Should Iranian oil exports cease entirely, it could prompt serious retaliation from Iran and threaten global oil supply chains.

2. China’s Role in the Region

China has emerged as a significant player in this energy calculus. As the principal purchaser of Iranian oil, China is invested in keeping oil prices low. Its economic relationship with Iran could become a moderating factor, as any actions resulting in widespread conflict would jeopardize this trade arrangement. Therefore, while not directly influencing Israel’s military strategy, China can convey its disapproval of any aggressive moves that could disrupt oil supplies.

3. Interests of Other Regional Players

Other oil-rich nations in the Middle East, such as Saudi Arabia and the United Arab Emirates, are also unlikely to welcome an oil shock. While they would benefit from higher oil prices in the short run, the geopolitical instability could undermine their long-term economic interests. Particularly, Saudi Arabia has expressed intentions of normalizing relations with Israel, which remain a priority for both the Kingdom and the Biden administration.

Historical Context and the Likely Scenario

Looking back at historical patterns, oil has continued to flow through numerous conflicts in the Middle East, and current events suggest that this pattern will persist. The escalation of tensions might spark fears of an energy war, but the collective motivations of the involved parties seem to favor maintaining stability in oil markets. Predictions about Middle Eastern dynamics must, therefore, be approached with caution, as the complexities involved often defy straightforward interpretation.

Conclusion: War or Peace?

In the face of an escalating conflict, the possibility of a wide-scale energy war and skyrocketing oil prices appears less likely than many fear. The interplay of diplomatic pressures, economic interests, and historical patterns in the region points towards a more restrained approach from all parties involved. Ultimately, while peace may seem as elusive as a minor fluctuation in oil prices, the stability of this vital resource may prevail—even amidst the chaos of war.